Jaitley Needs Mani Lesson

Finally! The truth is now out. Arun Jaitley’s pretend achievements as Finance Minister have amounted to no more than squeezing the lemon till the pips squeak. They are squeaking so loudly that his government has been compelled to reverse policy and lower by a tithe the zooming prices of petroleum products. All that Jaitley has really done these last close-to five years has been to rake in the goodies through escalating ad valorem excise duties to secure the wherewithal to keep his various deficits under some sort of apparent control. Now that the burden on the consumer has become unbearable, he finds he has to sacrifice something in revenues even if that leaves in tatters his reputation as a Finance Minister who knows how to balance his budget.

A modest estimate of the government revenues he has squeezed out of petroleum products is about 15 lakh crores over the last five years. That is what has kept his reputation humming. But now the point has been reached where more than his reputation is at stake. It is the continuation of central government’s rule that is at stake. The masses have learned enough about the economics of petroleum products’ pricing as to start asking sharp questions and questioning the answers – just a few months before Modi faces the wrath of the people at the hustings.

The story goes back to December 1997. At that time, crude oil prices were hovering around the $10-a-barrel mark. At its very last meeting, when the Gujral government had already lost the confidence of parliament and knew it was doomed, the cabinet took the decision to abandon the practice of government-administered prices and to instead throw the nation’s fortunes in the lap of the market. The decision passed muster because domestic petrol prices were around Rs 20 a litre and diesel under Rs 10 a litre. Compare this to current prices (before the latest excise duty cut) when we see petrol prices touching, and even crossing, Rs 90 a litre and diesel not much behind. Obviously, a pricing policy conceived when crude was selling at ten dollars a barrel cannot be the optimum policy when crude prices have soared to eight times that figure.

Indeed, this wisdom dawned on my predecessor as Petroleum Minister, Shri Ram Nayak (now Governor, UP). For his first few years in office after the NDA won the election in 1999, Ram Nayak left the market to its own devices to set the domestic price of petroleum products. But once crude crossed 25 dollars and continued moving northwards, he was compelled, like Jaitley now, to start edging back to a regime in which the government, and not the market alone, would determine prices, principally with a view to lessening the burden on the consumer. That did not help Vajpayee return to power, for it was too little too late, even as Jaitley’s latest U-turn is too little and too late. The damage already inflicted on the consumer, who is also the voter.

Later on Mani Shankar Aiyar came in as Petroleum Minister in the last week of May 2004. It was a ‘temporary, additional charge’ that was not expected to last beyond a few weeks. But the moment was ‘historic’ for crude prices had then crossed the unprecedented mark of 30 dollars a barrel. So unprecedented that at Aiyar’s first press conference, set up within 24 hours of him taking charge, he invited the Saudi Ambassador to sit next to him — and he solemnly informed the gathered media persons that his government ideally wanted crude prices to not rule above 27 dollars a barrel! That eventually proved to be the understatement of the decade for, by 2012, the average annual crude price peaked at 109.45 dollars per barrel and has on occasion even topped 140!

In May 2004, Aiyar’s blooding began with having to rein in consumer prices without hurting the economy as a whole in a never-before-seen scenario of crude prices relentlessly rising over 30 dollars. In parliament, Rama Prasad Goenka drew Aiyar’s attention to a report in a US business magazine predicting that crude would inevitably cross a hundred dollars. Aiyar laughed it off because that sounded incredible. How wrong he was!

At that time government solution was “equitable burden sharing”. There were (and are) six major stakeholders in determining the pricing of petroleum products: the central government; the state governments; the upstream petroleum exploration companies (principally ONGC and Oil India); the downstream public sector refiners and retail marketers (Indian Oil, Hindustan Petroleum, Bharat Petroleum etc); private sector refineries (principally Reliance); and the Consumer. Aiyar’s view was that instead of taking the easy road of passing on the full cost of higher crude prices to the consumer, which was already creating a furore, why not equitably share the extra burden among all the stakeholders, so that the consumer is spared much, if not all, of the burden?

Accordingly, central excise duties were lowered but customs duties on crude imports were raised, thus compensating the Finance Ministry to some degree for the drop in its revenue off-take. The first to protest the imposition of customs duties was Mukesh Ambani whose Jamnagar refinery was undoubtedly hit by this decision. But, the then UPA Government dodged his arrows. The public sector refineries, of course, grumbled about customs duties on imported crude but quickly fell in line.

The next giant to tackle was ONGC and other exploration companies like Oil India. These upstream exploration companies had been granted the privilege of marketing their output at international prices. So even as the Sheikhs prospered with every dollar rise in crude prices, so did ONGC and others in the same business, for no effort of their own but in tandem with every additional cent the Sheikhs gleefully pocketed. As this amounted to a wholly “unearned” bonus, upstream companies like ONGC were compelled by government orders to give a discount to downstream oil refining companies. To ensure “equitable burden sharing” when crude crossed 30, ONGC and other companies engaged in the same business were asked to share some of their additional “unearned” income with the oil refining companies by deepening the discount.

As for the refineries, their complaints about “under-recoveries” were kept to one side although they did their best to confuse public opinion by equating “under-recoveries” with “losses”. In fact, under-recoveries are the difference between what the refineries would have earned if they had been permitted to market their output at international prices and the government-administered price at which they were required to retail petroleum products in the domestic market. In other words, “under-recoveries” are a notional, not an actual, loss and that has not stopped Indian Oil from becoming the “most profitable PSU for the second consecutive year” trailed only by ONGC as the second most profitable.

Thus, Jaitley not only gains from high customs and excise duties, he also rakes in the dividends from these highly profitable public sector entities, which make their profits by getting the consumer to empty his pockets. No wonder Jaitley is in glee every time crude prices rise. This is a government whose solvency is determined more by OPEC and US shale oil producers jacking up prices than by any particular effort on their own part. No wonder that for 4 and half years, Jaitley has not allowed this golden goose to slip from his hands — and hang the consumer!